The US dollar halted last week’s slide against a basket of currencies but remains mixed after US Treasury Secretary Timothy Geithner announced plans to purge toxic assets from bank’s balance sheets through massive public-private ventures. After Geithner’s announcement, hedge fund and private-equity firms such as BlackRock Inc. and Blackstone Group LP announced their interest in increasing their holdings of distressed debt. The initial reaction to last week’s Fed quantitative easing announcement was to sell the dollar, but after Geithner’s plan was unveiled yesterday, investors began to think that the US may be the leader in the global economic recovery.
Although economic uncertainty still hangs overhead, investors are looking past the current uncertainties toward a US economic recovery, encouraging dollar beneficiary in the medium to long term.
The euro weakened against the dollar after Eurozone policymakers suggested more room to cut interest rates. ECB Governing Council member Erkki Liikanen said more non-traditional measures would be needed to get credit flowing if downside price pressures increased and recession lingered. Data this morning showed manufacturing and services sector activity contracted significantly, pointing to an accelerating pace of contraction in the economy.
The British pound rallied against the dollar and euro as optimism was buoyed by the US’s plan to buy toxic assets and unexpected strong UK inflation in February. British consumer price inflation rose to 3.2% in February, well above Bank of England’s target 2%.
The Japanese yen weakened against the dollar as Japan’s economy continues to weaken, eroding the unit’s safe-haven status. Japan’s central bank governor said corporate credit conditions remain severe, and he urged banks to bolster capital. The government extended $5.2 billion in loans from its reserves to the Japan Bank for International Cooperation (JBIC), a state-backed trade financier to support the economy during the crisis. As worries that the yen is overvalued combined with concerns over Japan’s economic health, watch the yen to remain under pressure.
The Canadian dollar erased some of its overnight gains against the US dollar as some weakness in the stock markets prompted caution. With little economic news to drive the currency this week, analysts expect the loonie movement to come from equity and commodity markets.
The Australian and New Zealand dollar maintained their recent rally against the US dollar as investor’s appetite for risk sparked on Geithern’s plan. With the recent Aussie rebound, some investors have vacillated between bets on whether Reserve Bank of Australia will cut rates by 25 basis points, instead of 50 at its next policy meeting on April 7th. The kiwi’s gain against the greenback was capped as analysts forecast data later in the week to reflect the economy is mired in deep recession.
10-Year Treasury Note Yield: 2.714%
Dow Jones Industrial Average: 7,690.63 – 84.91